I believe that Post might be worth more than $100/share in 2-3 years.  Post has a valuable distribution platform and some valuable brands.  Post also has a world class CEO with a 33 year track record of compounding shareholder capital at high rates through product innovation, deft advertising/marketing, and aggressive capital allocation. 

Bill Stiritz

I’m starting with a CEO background because I think under average management, returns to Post shareholders might be less interesting, so Stiritz is key to my model assumptions. 

In January 1982, Stiritz became president and CEO of Ralston Purina after 17 years with the company.  He was an unlikely candidate, but won the board’s support by submitting a short summary of the strategy he would pursue to improve shareholder returns.  He took no salary and received all of his compensation in the form of stock options.  At that time Ralston Purina was a collection of businesses left over from an unsuccessful conglomerate strategy pursued throughout the 1960s and 1970s.  Stiritz immediately began divesting unattractive businesses and focused the company on pet food and consumer packaged foods.  The businesses he divested included: Jack in the Box, the Keystone ski resort, mushroom and soybean farms, and a hockey team.  Ralston Purina stock traded for about $1.25 per share in January 1982.  He initiated an aggressive stock repurchase program, before repurchases were popular.  Ultimately Ralston would repurchase 60% of its shares.  Stiritz would oversee a fifty-fold increase in operating profit, primarily via new product development.

In 1997 Ralston Purina simultaneously sold its branded cereal and snack businesses to General Mills and spun off the private label cereal, baby food, cookie, cracker and ski resorts businesses into New Ralcorp.  Stiritz held no board or management positions at Ralcorp.

In April 1998 Ralston Purina spun off its animal feed business into Agribrands.  Stiritz became chairman, president and CEO of Agribrands.  In the ensuing three years, Agribrands volumes and product prices declined due to declining commodity prices and competition.  EBITDA grew 27% over the three year period, solely due to SG&A cuts.  Very little was invested into acquisitions ($18 million) or stock buybacks ($34 millon).  However, in May 2001, Agribrands was sold to Cargill for $54.50 per share, a 55% premium to its spinoff price.

In April 2000, Ralston Purina spun off Energizer to shareholders.  Stiritz became chairman of Energizer.  At the time of the spin-off, Energizer was a pure play battery business and was in decline, similar to Post’s cereal business.  In 2001 the battery business declined 12%, coinciding with the launch of the first generation iPod.  In March 2003 Energizer acquired the Schick-Wilkinson Sword business from Pfizer, which included the Schick men’s shaving brand and the Intuition and Silk Effects women’s shaving brands.  Energizer paid 7.4x the following year’s EBITDA for Schick, and 5x 2007 EBITDA.  Schick revenue and margins steadily improved under Energizer ownership – margins increased from 14% in 2003 to 20% in 2007.  In 2002 the battery business returned to growth and continued to grow through the remainder of Stiritz’s tenure, culminating in 10% growth in 2007.  In October 2007, Energizer acquired Playtex Products.  During Stiritz’s tenure Energizer’s shares outstanding decreased from 102.6 million in 1999 to 58.3 million, a reduction of 43%.  At the time of its spin-off, Energizer traded at $23/share.  At the time of Stiritz’s resignation as chairman, the stock traded for $85, a roughly 20% IRR.  Not bad for a declining business.  He timed his departure from Energizer perfectly.  He didn’t, however, sell his Energizer shares at the time of his retirement.  The last ownership record I could find shows that he owned 3.8 million shares as of 12/31/08, but in later proxy statements he isn’t included in the 5% owners table.

In 2001, Stiritz negotiated the sale of the Purina pet foods business to Nestle for $33.50/share. 

In 2012, Stiritz sold Ralcorp to Conagra in a contentious negotiation for $90 per share.  Conagra initially offered $82 for Ralcorp, then increased their offer to $86, then $94.  Interestingly, Conagra ultimately paid $90 for Ralcorp excluding Post, even though Post had $900 million of equity value at the time of its spin-off, which implies an adjusted price for RAH of $106 per share on terms comparable to the original offer.

Prior to selling Ralcorp, Stiritz spun off Post Holdings and became chairman and CEO of Post.  Characteristically, Stiritz takes no salary or cash bonus at Post, instead taking all options.  He owns $130 million notional of Post stock, almost exclusively through options.

What I find most interesting is cataloging what Ralston Purina shareholders ended up with after 33 years of spin-offs, divestitures and acquisitions.  Remember that when Stiritz was hired as president/CEO in January 1982 we could have paid as low as $1.20 per share for Ralston Purina.  I think this best summarizes why Stiritz is so loved by the investment community and why he is so wealthy.

Company           Per Share Value

Purina                 33.50    Sold in 2001, not adjusted for time value

New Ralcorp      30.00    RAL shareholders received one share of RAH per three RAL shares

Energizer            35.00    RAL shareholders received one share of ENR per three RAL shares

Agribrands         5.45       RAL shareholders received one share of Agribrands per 10 RAL shares

Post Holdings    8.70       RAH shareholders received one share of POST per two RAH shares

Total Value        112.65 

So Stiritz and several of the managers and board members of Post, have overseen at least a 100-fold increase in time value adjusted per share value for Ralston Purina shareholders (of which I’m sure there are zero) who held all of the spin-offs. 

Ball Corp.

In the period after resigning as president and CEO of Ralston Purina (but retaining his chairmanship), Stiritz managed his personal investments via an investment partnership called Westgate Group.  Stiritz has demonstrated impeccable timing in the publicly disclosed investments he has made in his personal account.  The first such investment was made after selling $56.5 million worth of Ralston Purina stock at what proved to be the high for four more years, and using some of the proceeds to buy $8 million worth of Ball Corp stock at a split-adjusted $5.  Stiritz bought 199,000 shares in June 1998.  Sometime between 1998 and 2003, he acquired an additional 70,000 shares.  Stiritz served as a director of Ball from 1983 to 2005.  On June 16, 2005, Stiritz filed his last Form 4 when he retired as a director and still owned the same 270,000 shares (split-adjusted), but it’s unclear what he’s done with the position since then.  Almost no matter what his holding period was, Ball has been a spectacular investment, returning 22% annually from June 1998 to June 2005 and 15% through today.

Church & Dwight

Another publicly disclosed investment that Stiritz made was the January 9, 2002 disclosure of a 5% stake in Church & Dwight.  According to the 13-G Stiritz’s average cost was about $8.66 split-adjusted.  Stiritz’s ownership subsequently fell below 5% due to share issuance, so it’s impossible to know when or if he ever sold his CHD position.  But again, because of the phenomenal timing of the purchase, no matter when he sold, CHD was a spectacular IRR for him, compounding at 18% annually through today.

Post Holdings

Having now set a VIC record for effusiveness, let’s move on to the current opportunity.  Post was spun off from Ralcorp on January 27, 2012.  At the time of the spin-off, the cereal business was declining 3% per year and Post was levered 3.6x debt/EBITDA, not a recipe for a rich valuation.  Soon after the spin, the Post board granted Stiritz 1.55 million options struck at $31.25.  He received about 400,000 POST shares from his RAH ownership.  He also subsequently received another 600,000 options on October 17, 2013 struck at $40.30.  So today he has about $130 million of notional exposure to Post stock. 

In the September 2012 quarter, the cereal business returned to healthy revenue and gross profit growth.  However, the added cost of being a separate publicly traded company and additional sales and marketing expenses caused EBITDA margins to decline.  Fast forward to the September 2013 quarter, and the core Post Foods business grew revenues 2.7% organically, but organic gross margins were down 270 bps due to a shift in mix toward the new private label business.  Gross profit dollars declined $3.9 million organically year over year in Q4 ‘13.

Post Acquisitions

Since becoming publicly traded two years ago, Post has already completed six acquisitions, almost one per quarter.  Below I detail each one.

Attune Foods

Closed 12/31/12

Price                    9.2

Revenue             8.0-14.5             

EV/Revenue      .6 – 1.2x

Est. EBITDA        2-4

EV/Est. EBITDA 2.3 – 4.6

Attune is a manufacturer of premium cereals, including organic, gluten-free and non-GMO products.  Brands include Erewhon and Uncle Sam.  Attune also has a line of probiotic chocolates under the Attune brand.  These are brands with relatively high awareness found in most health food and premium grocery stores, as well as some discount supermarkets. 

Assuming that Attune can be folded into Post at the same margin as Hearthside, 26%, EBITDA is $2-4 million.  So the price was obviously very attractive, unfortunately the deal was too small to significantly move the needle materially. 

Hearthside

Closed 5/28/13

Price                    160

Revenue             70

EBITDA               18          Including synergies

EV/Revenue      2.3x

EV/EBITDA         8.9x

Debt                    90          5x EBITDA

Equity                 70

Interest Exp.      6.5         7.2%

Maint. Capex     1.5         2.0% of revenue

Cash EBT            10

Taxes                  3.3         33% GAAP tax rate

Levered FCF       6.7

Lev. FCF Mult.   10x

Post acquired the branded and private label cereal, granola and snacks business.  Brands include: Golden Temple, Peace, Sweet Home Farm, and Willamette Valley.  Assuming Post put five turns of debt ($90 million) on Hearthside at 7.2% interest, assuming maintenance capex of 2% of revenue, Post probably paid about 10x levered free cash flow for Hearthside, and this is without subtracting what the company says is $25-30 million in present value of tax savings from tax-deductible goodwill amortization.  Net of the tax savings, Post might have paid something like 4.0 – 4.5x levered free cash flow.  Another way of looking at it is that as an asset purchase, the Hearthside acquisition generated $135 million of goodwill and intangibles that will generate about $9 million per year of tax-deductible amortization over about 15 years.  This amortization will reduce cash taxes by $3 million per year, so free cash flow may be more like $9.7 million, making the equity/levered FCF multiple more like 7-8x.  Any way you look at it, Hearthside will be accretive relative to stock buybacks or most other uses of capital.  The Attune and Hearthside brands are solid brands, that by management’s account, are growing double digits.

Premier Nutrition

Closed 9/1/13

Price                    180

Revenue             135

EBITDA               18.5

EV/Revenue      1.3x

EV/EBITDA         10x

Debt                    90          5x EBITDA

Equity                 90

Interest Exp.      6.5

Maint. Capex     3.0

Cash EBT            9.0

Amortization     10.0

Cash Taxes         0

Levered FCF       9.0

Lev. FCF Mult.   10x

Premier is a manufacturer of protein shakes, bars and cookies, and glucosamine and chondroitin supplements.  Premier marks the first diversification away from cereals.  Premier Protein is a pretty strong brand in the protein drink space.  As with all of Post’s acquisitions to-date, Premier will likely benefit from Post’s pervasive distribution platform and strong relationships with retailers and distributors.  I believe there will be revenue benefits to being part of Post.  I also wonder what cost synergies may exist.  The Goldman Sachs analyst’s analysis of Nielsen data suggests that Premier is growing revenues in the neighborhood of 40%.  I believe Premier was a good use of capital given the reasonable multiple, fair to good brand value and high growth characteristics.

Dakota Growers Pasta

Closed 1/1/14

Price                    370

Revenue             300

EBITDA               44

EV/Revenue      1.2x

EV/EBITDA         8.4x

Debt                    220

Equity                 150

Interest Exp.      16

Maint. Capex     6

Cash EBT            22

Amortization     0            Unclear if any intangibles were generated, but most likely there was          

Cash Taxes         7

Levered FCF       15

Lev. FCF Mult.   10x

Dakota is primarily a manufacturer of private label pastas.  They also own the Dreamfields Pasta low-carb, low glycemic index pasta brand.  Stiritz has experience running private label food businesses at Ralston.  I think Dakota is probably low or no growth today.  Maybe the strategy is to use Post’s platform to increase distribution.  As a business purchase, Dakota generated no tax-deductible goodwill.  Again, I wonder if any cost savings are possible.

Golden Boy Foods

Expected to close on 2/1/14

Price                    290

Revenue             150

EBITDA               32

EV/Revenue      1.9x

EV/EBITDA         9x

Debt                    150

Equity                 140

Interest Exp.      11

Maint. Capex     3

Cash EBT            18

Amortization     0            Unclear if any intangibles were generated, but most likely there was

Cash Taxes         6

Levered FCF       12

Lev. FCF Mult.   12x

Golden Boy is a manufacturer of private label nut butters, and will be combined with the Dakota business to form a larger private label business.  It is growing at a solid double digit percentage.  It seems like a respectable use of capital.

Dymatize Enterprises

Expected to close on 2/1/14

Price                    380

Revenue             146

EBITDA               36.5

EV/Revenue      1.9x

EV/EBITDA         9x

Debt                    180

Equity                 200

Interest Exp.      13

Maint. Capex     3

Cash EBT            20

Est. Amort.        20

Cash Taxes         0

Levered FCF       20

Lev. FCF Mult.   10x

Dymatize is a manufacturer of protein powders and bars, and will be combined with Premier.  Dymatize is also growing double digits.  It seems like a decent use of capital, but I think that the issuance of the convertible preferred to fund Dymatize and Golden Boy was probably a wash. 

To sum the acquisitions up, Post has completed six acquisitions for a total price of $1.4 billion at a multiple of 1.7x revenue, 9.2x EBITDA and a blended levered free cash flow multiple of probably 10x.  These businesses now represent 45% of run-rate Post Holdings revenue and probably a similar percentage of EBITDA.  These businesses are mostly growing at double digits.  I believe that in 2017, roughly two-thirds of the revenue will have been acquired since the spin-off, and only one-third will come from the legacy cereals business.  One can see that Stiritiz is building a business that increasingly is outside the core low-growth cereal space, and increasingly higher-growth.  It’s my belief that ultimately the market, or an acquirer, will give Post a high consumer packaged foods multiple similar to General Mills or Kellogg.  Both Kellogg and General Mills are diversified foods businesses with low-growth cereal segments bolstered by higher growth snack foods segments.

My underlying assumption is that Stiritz continues to acquire at a pace that maintains the current level of leverage.  The reasons I have confidence in this assumption are twofold and conclusive:

1) Since the spin-off they have maintained this level of net leverage

2) On July 18, 2013 Post cancelled their credit facility.  The facility was available through February 3, 2017 and cost 2.22%.  Post replaced this facility with notes that cost 7.38%.  The facility carried a leverage ratio covenant of 5.50x debt/EBITDA through 10/1/13, declining to 5.25x on 10/1/14 and further to 5.00x on 10/1/15.  The only reason to repay and cancel a super cheap credit facility is because you want to run with leverage at or above the covenant. 

If we begin with a leverage assumption, then it drives the rest of the model, we only need to make assumptions about organic growth and margins. 

Model

So if in three years Post does $8/share in free cash flow and in two years it trades for 14.5x NTM free cash flow, the stock might trade for around $115.

Risks

Loss of Bill Stiritz.  I think of this less as a risk of permanent capital loss because the stock trades for about 9.5x NTM free cash flow, but more of a loss of upside.  Stiritz is 79.  According to the Social Security Administration actuarial table, a 79 year old male has a 5.6% chance of dying in the next year and can expect to live to the age of 87.6.  It’s my baseless opinion that being a billionaire adds 10 years to one’s life expectancy.  On the other hand, Stiritz’s age might create a greater sense of urgency.  Certainly the pace of acquisitions has exceeded my expectations and the pace at his prior companies.

Continued fragmentation of the breakfast foods market.  It’s probably safe to assume that even though Post is diversifying away from cereal that consumer breakfast food choices will do nothing but increase over time.  Preferences will also certainly change – today preferences are shifting toward high protein, maybe next year’s obsession will be different.

Herbalife-related distractions.  Stiritz owns 6% of Herbalife, an investment worth about 3x the notional value of his Post position, so it could become a big time suck away from Post.  I don’t have an opinion about Herbalife or the wisdom of this investment.  I also don’t mean to rub salt into the shorts’ wounds by gushing about Stiritz, God knows I know what a short squeeze feels like.

Leverage.  While this is always a risk to equity holders, it’s worth noting that today none of Post’s debt carries a financial covenant.